How do ULIPs work

When you look at financial instruments that offer you the opportunity of investment, conventional investors opt for products like public provident fund or fixed deposits. However, there are various drawbacks with these products if you want to enjoy good returns and accomplish life goals with the proper financial support. In recent times, ULIP has become popular among first time investors. You should consider investing in it if you wish to grow your wealth keeping the future in mind. Here’s how ULIP works: 

Understanding the product

ULIP stands for Unit Linke Insurance Plan. It is a type of life insurance policy which offers the investor dual benefits of investment and life insurance under the same plan. The premium that you pay towards the plan is divided into two components. 

In the investment component, your money is invested in funds such as equity funds, debt funds and balanced funds. The nature of the investment is based on your risk appetite and your requirements.

In the life insurance component, you are provided with a life cover. If something unfortunate were to happen to you, the life cover amount would be given to your family as death benefit . This amount can be used by them to take care of daily expenses and set aside money for future goals. 

How does it work?

Given below are the process of this plan works:

1. Firstly, you need to be aware of what your goals are. It is always advised to remain invested in the plan for long-term. Based on your goals, you have to decide the duration of your plan, amount of premium, type of premium payment and life cover.
2. If you wish to pay the premium on monthly or half-yearly basis, you can go for the regular premium payment mode. However, if you wish to make a one-time lump sum premium payment, you can go for the single premium payment mode.
3. As one part of your premium is allocatedtowards the investment component, you need to decide which funds you want to invest in. The type of funds available are equity, debt and balanced funds.
4. Equity funds are high-risk, high return funds. The returns from equity funds are high, however, they carry a higher risk factor due to the nature of equity market. If you have a high-risk appetite and wish to gain higher returns quickly, you can opt for this fund.
5. Debt funds are medium-risk, low to medium returns funds. Due to lesser risk compared to equity funds, you can opt for this fund to get consistent returns. However, the returns are lower compared to equity funds. 
6. Balanced funds are a mixture of equity and debt funds. It is advised to invest in such funds to maintain the consistency of your returns in the event of market instability.
7. After you have selected the funds and the proportion of the investment, the premium would be allocated accordingly.
8. During the lock-in period of the plan, your investment will start accumulating the returns.
9. You are allowed to make partial withdrawal from your funds in ULIP, meaning you can make a withdrawal within the limit allowed by the insurer during the plan. However, the withdrawal can be made only after the end of the lock-in period, which is of five years.
10. If you wish to increase the premium amount, you can do a top-up premium payment as per your convenience.
11. If you wish to redirect your premium from one fund to another, you can take advantage of the premium redirection in future. This allows you to redirect the premium amount from one fund to another fund during the next premium cycle.
12. Alternatively, you can do a fund switch, which changes the ratio of your investment from one fund to another to safeguard your investment.

Things to keep in mind

1. If you survive the term of the plan, you would be awarded with the maturity benefits from the plan. However, if you lose your lifeduring the term of the plan, the life cover amount would be awarded to your nominee as a death benefit. 
2. You are allowed to make only a certain number of partial withdrawals during one cycle. 
3. If you surrender the policy during the lock-in period, the returns accumulated on your investment would be paid to you only after the end of the period and not beforehand. 

ConclusionIf wealth creation and financial protection are your priorities, you should consider investing in this product. You can use the ULIP calculator to get an idea about how much your premium could be as per your requirements.